A Dubai civil court has ruled to invalidate the interest clause in a loan agreement disguised as an investment, determining that it was, in fact, a personal loan laden with concealed interest. The court upheld the validity of the loan contract but annulled the interest condition, citing its contravention of public policy. It also directed the lender to return 38 cheques, which had been used as collateral for interest payments, while obliging the borrower to repay the remaining principal after accounting for prior payments.
The Case Background
The case began when a borrower filed a lawsuit explaining that he was compelled to take out a loan of AED 1.835 million in 2023 due to a liquidity crisis. The lender required him to sign an agreement that stipulated fixed monthly payments of AED 46,050 for a duration of 36 months, as well as the issuance of 38 cheques and notarised documentation confirming the debt as a guarantee for the agreement.
Dispute Over Nature of Agreement
The borrower argued that the agreement, although framed as an investment and financing scheme, was essentially a personal loan concealed under a veneer of investment. He claimed he had been making the monthly payments until he was informed that these payments were solely classified as interest, leaving the principal amount outstanding. This revelation led him to seek the court’s intervention to annul the agreement, restore his position, and reclaim the cheques while invalidating the debt acknowledgment.
The Lender’s Position
The lender contended that the transaction was not a loan but an investment in a business venture, asserting that the monthly returns were pre-agreed investment profits. He requested that the court conduct an investigation to substantiate his claims and initiated a counterclaim demanding the repayment of the principal investment sum along with the agreed returns, plus compensation for alleged damages. However, the court dismissed this characterization, clarifying that the essence of contracts must reflect their true nature and intentions, rather than mere labels imposed by the parties involved.
Court Findings and Ruling
The court noted that the expert report and terms of the agreement confirmed that the money was disbursed to the borrower as a loan with a commitment to pay fixed monthly installments, which contradicted the underlying principles of investment based on profit and loss variability. It ruled that the monthly payments, regardless of being labelled as ‘returns’ or an ‘additional amount,’ were in reality concealed interest, violating the provisions of the Civil Transactions Law and principles of Islamic jurisprudence that prohibit any additional benefits on the principal in personal loans.
Legal Implications
The court clarified that while the annulment of the interest condition does not nullify the loan contract itself, it does eliminate the unlawful clause, leaving the contract intact. Consequently, it established that only the excess benefits are void, thus mandating the borrower to repay the principal amount.
Final Decision
Based on the expert findings, the court calculated that the borrower owed AED 1.126 million after deducting the sums already repaid. It instructed him to settle this remaining amount while rejecting the lender’s claims for what he termed ‘investment returns,’ categorising them instead as usurious interest that the court has invalidated. Moreover, the court ordered the lender to return the 38 cheques that were provided as collateral, which were now associated with the condition ruled unlawful by the court. However, it declined the request to invalidate the notarised debt acknowledgment, citing no evidence of coercion during its signing, with the borrower maintaining the validity of his signature.